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The term structure of interest rates and economic activity: An empirical critique

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  • Watkins, Clinton

Abstract

Intertemporal asset pricing models, relating macroeconomic variables to asset returns and the term structure of interest rates, suggest that the term structure (yield curve) contains forecast-enhancing information about the future growth rate of real economic activity. Empirical evidence that the term structure contains information regarding a variety of macroeconomic variables has been presented in the literature over the last two decades. Recent empirical studies on the information content of the yield spread have been conducted using simple linear univariate forecasting models. U.S. and G7 data have been found to support a leading association between the term structure of interest rates and changes in the level of future real economic activity. However, many of the econometric models presented in the literature are far from adequate; in particular, several empirical studies of the term structure have not adequately accounted for important explanatory variables. The purpose of the paper is to evaluate the significance of these empirical models.

Suggested Citation

  • Watkins, Clinton, 1997. "The term structure of interest rates and economic activity: An empirical critique," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 43(3), pages 487-493.
    • Handle: RePEc:eee:matcom:v:43:y:1997:i:3:p:487-493
    DOI: 10.1016/S0378-4754(97)00036-0
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    References listed on IDEAS

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    1. Jeffrey A. Frankel & Cara S. Lown, 1994. "An Indicator of Future Inflation Extracted from the Steepness of the Interest Rate Yield Curve Along Its Entire Length," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 109(2), pages 517-530.
    2. McAleer, Michael, 1995. "The significance of testing empirical non-nested models," Journal of Econometrics, Elsevier, vol. 67(1), pages 149-171, May.
    3. John C. Cox & Jonathan E. Ingersoll Jr. & Stephen A. Ross, 2005. "A Theory Of The Term Structure Of Interest Rates," World Scientific Book Chapters, in: Sudipto Bhattacharya & George M Constantinides (ed.), Theory Of Valuation, chapter 5, pages 129-164, World Scientific Publishing Co. Pte. Ltd..
    4. Estrella, Arturo & Hardouvelis, Gikas A, 1991. "The Term Structure as a Predictor of Real Economic Activity," Journal of Finance, American Finance Association, vol. 46(2), pages 555-576, June.
    5. Chen, Nai-Fu, 1991. "Financial Investment Opportunities and the Macroeconomy," Journal of Finance, American Finance Association, vol. 46(2), pages 529-554, June.
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    Cited by:

    1. Maciel, Leandro & Gomide, Fernando & Ballini, Rosangela, 2016. "A differential evolution algorithm for yield curve estimation," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 129(C), pages 10-30.

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